From the nation’s capitol to Arizona’s, politicians on both sides believe that they harness the power to grow the economy. Priming the pump, as they say. Not to state the obvious, but if in fact government actually had this power wouldn’t the model have been perfected by now and not subject to much debate . . . anywhere? Sort of like flicking a switch to get a light to come on. Too bad it’s still dark. Chris Edwards from the Cato Institute succinctly highlights the fallacies of Keynesian economics.

It’s great to own a home, but we’ve seen some of the unintended consequences of governmental policies, i.e. cheap money (low interest rates), tax deductible mortgage interest, etc. People who shouldn’t have bought houses did, people bought more than they could afford, and lots of people bought on the notion that their house was always going to increase in value.

Now that the auto industry is suffering badly, along comes a proposal from Sen. Mikulski (D-MD) to make auto loans tax deductible.

Why would we do this? Is this really going to save the auto industry or jump start our economy? This is an artificial way to stimulate purchases. When that happens, there’s an inflated sales variable that auto dealers should factor in, but probably won’t since they’re just happy to keep their doors open. What happens when the government programs expires (ha!). Government programs NEVER expire (unless they’re Bush’s tax cuts).

Side note: I just don’t get this about liberals. If lower taxes (tax deductible auto loans) spur investment (in cars), then why don’t they concede that lower taxes might just spur something else? And why do politicians care what gets spurred anyway?

Back to Mikulski’s terrible idea: She only wants some people to get the benefit on some cars. But if the point is to spur auto purchases, why not incentivize wealthy people to buy expensive cars? There’s no good reason.

The auto industry may very well need consolidation. If too few people are buying cars, then maybe some dealers need to close. When the economy picks up, new dealerships will open.

There is no need to subsidize auto purchases.

From his Dec. 4 column:

Three days after the president-elect announced in a radio address that he had directed his “economic team” to devise a plan “that will mean 2.5 million more jobs by January of 2011,” he said at a news conference that he favored measures “that will help save or create 2.5 million jobs.” To the extent that his ambition is clear, it is notably modest.

It is, however, unclear. How will anyone calculate the number of jobs “saved”? In what sense saved? Saved from what? Saved by what? By government action, such as agriculture subsidies or other corporate welfare? What about jobs lost because of those irrational uses of finite economic resources? Should jobs “saved” by, say, protectionist policies that interfere with free trade be balanced against jobs lost when export markets are lost to retaliatory protectionism?

In recent years, in normal conditions, the economy has “lost” tens of millions of jobs through capitalism’s “creative destruction” (Joseph Schumpeter’s phrase). It also has created a few million more than that, which is why the destruction is creative.

The whole column is here.

Today’s news is that Gov. Napolitano is being vetted by Pres-elect Obama’s team in preparation for an offer to become the head of Homeland Security.

I’m not one to subscribe to the theory that Napolitano can’t wait to get out of AZ because of the messy budget mess we’re in. I’m not exactly sure why I don’t subscribe to it. The state is at least $1.5 billion in debt (just this year) and the makeup of the legislature will be more conservative in January than it is today. One would think that the more conservative legislature will make it tougher for Napolitano to skate by with more bonding, borrowing, and fund sweeps (assuming there are any funds left to be swept).

But I think Napolitano really likes her job. I think she likes duking it out with Republicans. She almost always wins the media war that surrounds the legislative battles. She probably figures that voters won’t blame her for an explosion of state spending, which has massively expanded government’s tentacles during the flush years of 2005 – 2007. If history is any guide, Napolitano will fight tooth and nail with GOP lawmakers (many of whom, by the way, are just as adverse to cutting education and health care spending as Napolitano is). After a few flare ups where she scores a point or two and the GOP scores a point or two (this hasn’t happened in a while), the flames die down and she receives and accepts a lot of credit for getting the state out of the mess. Again, that’s if history is any guide.

The biggest wrinkle, however, is that the budget problem is not a typical budget problem. It’s among the worst in the country. The budget deficit is about 20% of the state general fund. Only California’s is bigger. On top of that, the GOP is now led by two people with whom Napolitano has no experience negotiating with. Kirk Adams is sure to work the media angle better than Spkr. Weiers, and Bob Burns won’t let a little negative press bother him in the slightest. Burns, more than anyone else in the legislature, knows what needs to be done, and he’s not afraid to try to make it happen. The key for Adams and Burns is working the media, and I think they’ve got a good shot at doing it.

I’m guessing Napolitano is leaving, but I have to say that I’m wishing I could see how this one might have turned out.

Dear AZ Republic Editor:

With regard to the article featuring ASU economist Dennis Hoffman (ASU economist in high demand during crisis, Oct. 20), the tax relief package passed in 2006 did not contribute to the multi-billion dollar deficit we now face. In fact, it likely kept it from being worse. The 10 percent income tax cut coupled with the $220 million property tax cut was scored as a $500 million reduction in tax revenue. That static measurement is like saying that of the $500 million left in the economy, not one dollar would be generated in taxes. Even assuming this unlikely result, the $500 million tax cut was equal to just 4.8 percent of the state’s general fund. It’s also a paltry two-tenths of one percent of gross state product.

The deficit, on the other hand, is 17 percent of the budget. To argue that a tax cut representing 4.8 percent of the budget has caused a 17 percent budget hole is a bit of a lark, especially when you don’t look at the spending side of the ledger.

From 2006 to 2008, state spending increased from $8.8 billion to $10.6 billion, or 21 percent. State personal income grew by only 11 percent. You can’t spend 10 percent more than you make and expect to have a balanced budget. Now imagine if the legislature hadn’t cut taxes in 2006. Not only would personal income taxes be higher and residential and commercial property taxes be higher, but the state would have spent that $500 million in tax relief on some other government program. In other words, if not for the 2006 tax cuts, we’d have higher taxes, higher spending, and therefore a bigger deficit and a weaker economy.